Arbitrage has two main forms:
(1) No arbitrage. That is, using the interest rate difference between the capital markets of the two countries, short-term funds will be transferred from the low interest rate market to the high interest rate market to obtain spread income.
(2) arbitrage. That is to say, the arbitrageurs use forward foreign exchange transactions to avoid the risk of exchange rate changes while transferring short-term funds from place A to place B for arbitrage.
Arbitrage will change the relationship between supply and demand in different capital markets, make the short-term capital interest rates in different places tend to be consistent, narrow the difference between the recent exchange rate and the forward exchange rate of money, and keep the interest rate difference in the capital market in balance with the exchange rate difference in the foreign exchange market, thus objectively strengthening the integration of international financial markets.
However, a large number of arbitrage activities will lead to a large-scale international flow of short-term capital and aggravate the turmoil in the international financial market.
Extended data:
Arbitrage trading modes are mainly divided into four types, namely: stock index futures arbitrage, commodity futures arbitrage, statistics and option arbitrage.
1, stock index futures arbitrage
Arbitrage of stock index futures refers to the behavior of taking advantage of the unreasonable price of stock index futures market, participating in the trading of stock index futures and stock spot market at the same time, or trading stock index contracts with different maturities and different (but similar) categories at the same time to earn the difference. Stock index futures arbitrage is divided into futures arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
2. Commodity futures arbitrage
Similar to the hedging of stock index futures, commodity futures also have arbitrage strategies. When buying or selling a futures contract, they sell or buy another related contract and close both contracts at a certain time.
It is similar to hedging in transaction form, but hedging is to buy (or sell) physical objects in the spot market and sell (or buy) futures contracts in the futures market; Arbitrage only buys and sells contracts in the futures market, and does not involve spot trading. There are four kinds of commodity futures arbitrage: spot arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
3. Statistical arbitrage
Different from risk-free arbitrage, statistical arbitrage is a kind of risk arbitrage by using the historical statistical law of securities prices, and its risk lies in whether this historical statistical law will continue to exist in the future. ?
The main idea of statistical hedging is to find several pairs of investment products (stocks or futures, etc.). ) has the best correlation, and then find out the long-term equilibrium relationship (cointegration relationship) of each pair of investment products. When the price difference between a pair of products (the residual of the cointegration equation) deviates to a certain extent, we start to open positions-buying relatively undervalued varieties, shorting relatively overvalued varieties, and making profits when the price difference returns to equilibrium. ?
The main contents of statistical hedging include stock matching transaction, stock index arbitrage, short-selling hedging and foreign exchange arbitrage transaction.
Option arbitrage
Option, also known as option, is a derivative financial instrument based on futures. The essence of option is to price the rights and obligations in the financial field separately, so that the transferee of the right can exercise his right to trade or not to trade within a specified time, and the obligor must perform it.
When trading options, the buyer is called the buyer and the seller is called the seller. The buyer is the transferee of the right, and the seller is the obligor who must fulfill the buyer's right.
The advantages of options are unlimited income and limited risk loss. Therefore, in many cases, using options instead of futures for short-selling and arbitrage trading will have less risk and higher returns than simply using futures arbitrage.
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